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How to Prevent Having Bad Debts


By Ayoade Apelegan

Just like individuals, businesses also suffer from too much debt. Taking on the right amount of debt and at the right time can make the difference between a business that succeeds and one that struggles.

A balance of debt and equity is needed by a business to keep the average cost of capital at its minimum.

While debt may not be good for individuals, debt can often be good for businesses. When debt is used right, it can have a huge range of benefits for a growing business that has an effective plan for the future.

Debt is used by individuals and businesses as a method of making large purchases that they cannot afford under normal circumstances.

A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.


Debt is an amount owed for funds borrowed. The lender agrees to lend funds to the borrower upon a promise by the borrower to pay interest on the debt, usually with the interest to be paid at regular intervals. A person or business acquires debt to use the funds for operating needs or capital purchases.


A debtor is a person who owes the bill or debt. Debtors may default for various reasons some which are; because of a lack of financial planning or over-commitment on their part; due to an unforeseen eventuality such as the loss of a job or health problems; dispute or disagreement over the debt or what is being billed for; or dishonesty on the part of either the creditor or the debtor.

The debtor may be either a person or an entity such as a company. Collection of debts from individual people is subject to much more restrictive rules than enforcement against a business.


Credit sales and services rendered on credit often come with the burden of collecting debts, maintaining a debtors’ records and incurring bad debts expenses.

Accounts receivables have to be tracked consistently. This way, you can update your records accordingly whenever debtors remit their outstanding payments.

Bad and doubtful debts arise when some of the receivables due to a business/individual become uncollectable. It is important to identify the bad debts and initiate appropriate actions to either recover or write off the debts.

Click here to read about Business Expansion Strategies and Options


Lapse of Credit Period

In business transactions, credit sales have a timeframe within which they must be paid. Depending on the credit policies of an organization and the contract that exists between the parties involved in the business dealing, the timeframe could be 30 days, 60 days, 90 days or 120 days.

A default of the credit periods yields bad debts.

For example, if a receivable was due 30 days after the date of sale but remains unpaid 60 days later, it becomes a bad debt. An accounts receivable ageing report can be used to track debtors’ remittances and promptly identify such bad debts.

Declaration of Bankruptcy / Insolvency

A receivable becomes a bad debt the moment a debtor declares bankruptcy/insolvency. Persons or entities declare bankruptcy when their cash inflows are significantly insufficient to cover their outstanding liabilities. This allows them to legally acknowledge their incapability to honour their pending debt obligations due to cash flow constraints.

However, the bad debts occasioned by bankruptcy/insolvency are not entirely irrecoverable. The court process may enable you to recover your debt in the course of liquidation or reorganization.

Death of a Debtor

Debts owed by individuals or sole proprietors may go bad with their demise. This is because individuals and sole proprietors are personally liable for their debts, and if the funds in a deceased person’s estate do not cover the debt, it could remain unpaid.

Payment may be pursued from any co-signers, spouses in a community property state, or anyone that have some legal liability for the deceased person’s debt.

Disputes with Vendors

When debtors dispute the quality or quantity of the products delivered / services rendered to them, such misunderstandings can delay the debtors’ remittance. If the dispute ends up in a court, then you will have to wait longer for the debt to be settled. You will have to designate the receivable as bad debt because it can only be cleared after sorting out the dispute with debtors.


Using a Good Invoicing System

A good invoicing system is required to prevent bad debt. This is an important part of collecting money.

Make invoicing a regular part of your business activity. This will not only help with your cash flow but will also help to keep track of your clients more easily.

Reviewing Payment Terms

Payment terms need to be structured to encourage prompt payment. If late-paying customers are a big problem, the business may consider adding a late fee clause to agreements and contracts. This will hasten payment from the customer’s end.

For example, you could offer a five per cent discount for payments made within 30 days, or charge interest on outstanding balances.

Money Upfront

Ask for money upfront before providing any goods or services.

Asking for money upfront is a way of sending a strong message to your customers that you are serious about your services and serious about payment.

Insist on payment upfront for any goods being delivered. Consider adjusting your system to fit in with this: for example, following up as soon as you realise your payment has been missed out – or calling in advance to ensure that a cheque will be issued.

Background Check

It might be necessary to carry out background on your customers to know their creditworthiness. This will help determine if such an individual or business is worth transacting business with.

Knowing that a business is legitimate and solvent will make you more confident in dealing with them.

Finding out as much information about the business, operations and finances as you can is a good way to avoid bad debt in the future.

Click here to read about how to manage business inventory


Debts should be managed and reduced as much as possible as it might be difficult to run a debt-free business.

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Keeping Track of Your Numbers

Knowing your numbers and getting familiar with them means that you know the cost of each item that makes up your raw materials, rent/lease, labour, etc., knowing these ensures that you’re not paying too much for something.

Inventory Optimization

If there are slow-moving inventory, check to see if you can adjust your purchasing habits or look for suppliers that will offer rights of return for unsold goods. This will free space for more inventory that might sell faster and increase revenue.

Increase in Margins 

Each industry has its benchmark for what is considered a strong margin.

Prices can be raised or costs can be lowered or both actions can be taken. The aim is to increase margins without increasing overhead expenses.

It’s important to communicate to existing customers before prices are raised and ask if they’ll like to make an order before the change in prices takes place.

The more the cash that can be generated, the faster one can reduce one’s debt.

Mark-downs on goods and discounts on services, especially for loyal and repeat clients, is an avenue to boost sales.

It’s important not to slash prices too much that one won’t be able to make up the lost cost with increased sales.


Product diversification is a strategy employed to increase profitability. Product diversification creates opportunities by increasing sales to existing customers and /or opening avenues to entirely new demographics.

Bringing on an Investor

Investors can offer injection of cash often in exchange for a piece/share of the company. In general, avoiding this option is best since it involves signing away a portion of your future profits but if times are really tough, it’s worth considering.

Assess and Rework Your Budget

Before tackling business debt, one needs to have a solid understanding of one’s current financial situation. Assess how the business budget is operating. Where exactly is your money going, and is it the best use of your funds?

A good business budget helps to identify income sources; fixed daily, monthly, and annual costs; and accounts for all variable expenses such as rent, or other unforeseen costs.

Ultimately, assessing and reworking one’s budget should be the first step in forming an action plan for reaching your debt-elimination goals.

This option might not be suitable for everyone—if you plan to restructure your debt (see below) you want to have as much cash on hand to look good to lenders. Carefully consider this method before making it a pillar of your debt elimination goals.

Communicate With Creditors and Lenders

You can do a couple of things here to help decrease your debt load or debt interest over time.

Investigate the opportunity to lower interest rates. It’s possible to negotiate or create lower interest rates.

For bank loans, you should call your loan manager and discuss options. If you’ve made regular payments and your business is in good financial standing, an argument can be made to lower loan rates in your favour.

However, chances are the interest rates for your bank loans are not the highest rates you pay. Try to work on lowering the highest interest rates first.

Consolidate your loans 

By consolidating into one payment, you reduce your monthly costs without harming your credit. The best-case scenario is consolidating several short-term loans into one long-term package with a predictable interest rate. This small business debt management strategy will greatly ease your repayment load and help keep you from going under.

Generate Revenue from Existing Assets

Do you have a large office space or a conference room? If yes, you can lease out a portion of your office to another business and also rent out your conference room. This helps you save on your rent and bring in additional income.

Reduction of Expenses

Are there certain operating costs and expenses that your business can do without? Decide which services and operations are necessary for the daily operation of your business, and cut the rest.

These expenses can be subscriptions or professional memberships that can be temporarily suspended.

It could also be a reduction in staff strength.

Are there employees that the business can do without? Consolidation of positions by paying one person more rather than paying benefits for two employees can be considered.

While the shrinking of the workforce is not an attractive option, it may be necessary to keep your business alive.

Hire a Debt-Restructuring Firm

Debt-restructuring firms negotiate with creditors and business debt collection agencies on your behalf to formally extend, renew, or change existing credit agreements.

The process generally involves a written contract between you and the debt-restructuring company as well as the setup of automatic withdrawals from your bank account to settle outstanding debts.

These firms do charge a fee, but it’s usually a less-expensive alternative to filing for bankruptcy and will better rehabilitate your credit in the long run.

Hire a Debt Recovery Agent

Engaging the services of a debt collection agent is about the most effective way to recover the money you’re owed.

Before doing so, contact your customer by phone or in-person one last time, writing a letter or email is also allowed. Let them know you plan to pursue debt recovery services.

Once you hand the debt over to a third party, there’s a strong possibility that the customer will realise you’re serious. Typically this means they’ll pay up either in full or in agreed instalments. 


At Matog Consulting, we make recovering your debts a pleasure with our time-honoured approach. We agree to a percentage of collected debts as our fees and we are also willing to work with you on a no-fee, no pay basis.

For debt recovery services, please call 08023200801 or email

You can also fill our contact form

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